08 August 2019

Are US and China heading for a currency war?

After the Chinese yuan plummeted on Monday vis-à-vis the US dollar the Chinese economy has recovered somewhat. The devaluation makes Chinese exports cheaper in the dollar area. Politicians in the US are now considering weakening the dollar through targeted sales. Commentators warn against using the exchange rate as a weapon.

Military confrontation could follow

The trade and currency dispute between the major powers could be just the beginning, Naftemporiki fears:

“Goldman Sachs noted in a memo that it doesn't expect the US and China to sign a trade agreement before the US elections in November 2020. Worse still is that the escalation of the trade and currency disputes with China is being accompanied by war games. Just a few hours after the announcement that the US was withdrawing from the nuclear weapons treaty of 1987 the US defence secretary announced that Washington intends to set up intermediate-range missiles in the Pacific. Naturally Beijing responded with a warning and called on 'our neighbours to be prudent and not allow US missile defence systems to be used on their territory'. This is a dangerous escalation.”

Don't touch the reserve currency

The US should avoid playing tit for tat, warns Ria Novosti:

“Randomly devaluating the dollar would be bad for its reputation and credibility. Maintaining the dollar's status as the main global reserve currency is vital for the stability of the US economy. [Former French president Charles] de Gaulle once described the dollar's status as 'extremely privileged'. Now they are willing to risk losing this privilege for the sake of winning a trade war with China and the EU - but also to use a devaluation to 'burn up' the immense debts and social obligations accumulated over the last two or three decades.”

EU urgently needs a plan

The EU could be the one impacted most in the conflict between the US and China, El País observes:

“As the US election draws closer Trump may become more inclined to accept solution-oriented negotiations, which in fact will be the only way out of the dead-end situation that threatens global stability. But until then, Europe is trapped in a crossfire with consequences that are complicating its already fragile economic situation. ... The question is whether the EU has a clear strategy for facing a prolonged conflict that could be devastating for the Eurozone. Unfortunately, the answer is probably no. ... Unless measures are take to stimulate the economy and to maintain a stable currency and exchange rates, the European economies may end up being the main victims of the global disorder.”

Accusation of manipulation

Hospodářské noviny looks at potential motives for weakening the yuan:

“The Chinese central bank only issues diplomatic announcements: It said that the drop in the national currency was influenced by market forces and that the yuan was not in any way being used to resolve a trade dispute with the US. ... Unsurprisingly the US takes a different view and has accused Beijing of manipulating the currency. It alleges that in this way China is trying to make it easier for its exporters to cope with the US's high tariffs. This should enable them to survive on the export market and remain profitable. US President Trump, however, is reluctant to weaken the dollar due to concerns about how this could impact the global financial market.”

A plunge with fatal consequences

For the Süddeutsche Zeitung the conflict has taken on a new dimension:

“As long as this was only about tariffs the economic consequences were noticeable but manageable. ... Now that there's also a monetary dimension, for the first time the financial markets will also be dragged into the conflict: those unstable constructs that have run amok so often in the past and which, once they were in trouble, could hardly be reined in at all. ... The consequences could be plunging exchange rates that paralyse consumption and private and corporate investment. ... A recession would cost millions of wage earners their jobs all around the world, plunging people into poverty and states into bankruptcy. It would be manmade and would have a fatal impact on both social cohesion and the future of Western democracy.”

China no longer counting on US

China has given up all hope of the trade dispute being settled anytime soon, NRC Handelsblad comments:

“For a long time, devaluating the Chinese currency was taboo for China itself. For political reasons the country saw such intervention as damaging to its image as a reliable and responsible international partner. Moreover, for years now China has been trying to stimulate domestic consumption and create a more equilibrated balance of trade with America. But lowering the currency's value won't help. If China no longer believes that the trade war will end soon then it will deepen its ties with other trade partners. ... The feared decoupling of the US and Chinese economies has to a certain extent already begun.”

US president losing control

Trump is losing control of the trade war he started a year ago, Vecernji list writes:

“The world has started to reorient itself economically and the process that Trump began a year ago with the introduction of extra tariffs has turned the status quo on its head. Although the US president stressed back then that he wanted trade wars because he wins them, the big question is what is really going on and how all this will end. Unfortunately there is a possibility that this economic conflict will end as real military wars do: in widespread destruction. But in that case the havoc won't be caused by bombs but by major recessions and economic crises that will make 2008 pale in comparison.”